WAEMU Currency Reforms Unlikely to Affect Sovereign Ratings

The currency reforms in the West African Economic and
Monetary Union (WAEMU) announced by Cote d'Ivoire's President, Alassane
Ouattara, on 21 December 2019 are mainly symbolic, as the peg to the euro will
be maintained and the currency will continue to benefit from a convertibility
guarantee, says Fitch Ratings. As a result, the changes to the currency do not
fundamentally alter the external liquidity risks of the two Fitch-rated WAEMU
members, Benin (B/Positive) and Cote d'Ivoire (B+/Positive).

The reforms will take effect once agreements are
formally signed, which is planned later in 2020. They comprise three elements:
the West African CFA franc will now be called the 'eco' in the WAEMU; the
regional central bank, Banque Centrale des Etats d'Afrique de l'Ouest (BCEAO),
will no longer have to deposit at least 50% of its international reserves on
its 'operations account' at the French Treasury; and France will no longer be a
member of the board of directors or the monetary policy committee at the BCEAO,
or of the regional banking commission.

The agreement will maintain the peg to the euro at the
same parity level (ECO655.957 per EUR1), and the convertibility to the euro
guaranteed by the French Treasury. It is likely that there will be minor
technical changes to the set-up of the convertibility guarantee, without
changing its purpose or core functioning. Fitch believes the convertibility
guarantee helps limit external liquidity risks. However, as under the previous
system, the guarantee does not protect against a sustained deterioration of
external solvency, for example due to excessive region-wide current account
deficits.

The transfer of all of the WAEMU's foreign-exchange
reserves to the BCEAO does not fundamentally change the region's liquidity
risks. Fitch considers the BCEAO's reserve reporting as credible, and expects
economic policies to continue to support the current level of international
reserves. There is, nonetheless, a risk that the BCEAO may be affected by the
loss of its current access to preferential interest rates on its deposits at
the French Treasury. We believe that more substantial changes to the
exchange-rate regime, such as a departure from the peg, are only a long-term
possibility.

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